How much revenue will shale gas extraction generate?

The amount of revenue shale gas could generate depends on how much gas we can recover – but the Institute of Directors believes it could ‘generate significant tax revenue’1.

For shale gas extraction to make sense, the price of natural gas on the wholesale market needs to be higher than the costs of extracting it. This means that, if shale gas extraction is less expensive than importing gas from abroad, the companies involved will go ahead. The price of other energy sources, such as coal, nuclear and renewables, will also have an impact, but most British homes are heated by natural gas, so a secure gas supply is very important.

The Institute of Directors (IoD) has produced calculations for a pad of 10 wells, each with four horizontal wells (laterals), which could heat a peak of 400,000 homes. In their model, the IoD assume that each lateral costs £6 million to drill, facility costs are £30 million and decommissioning costs are £40 million, with a total investment of just over £500 million – this includes operating expenditure, which is considerable, and the cost of getting the gas to market.2 According to Ernst & Young (EY), £333 million of capital investment is required to bring a well-pad of this scale into operation.3 This investment will be made by companies without subsidy from taxpayers.

John Williams, Senior Principal at Pöyry, a global consulting and engineering firm, told us that: “If the exploration process provides evidence of sufficient levels of gas which could be recovered at a reasonable cost and sold profitably on the wholesale market then operators can move towards positive final investment decisions with greater certainty.” He added that “shale gas produced here in Great Britain could also have other significant economic benefits in terms of job creation, tax revenue and improving the balance of trade.”

There will also be financial benefits to communities. The industry has committed to paying £100,000 to the local community living near to each exploratory well site where hydraulic fracturing takes place, together with a £20,000 community benefit payment per unique horizontal well over 200 metres in length and below 300 metres in depth. This will be paid by the operator, regardless of whether or not recoverable deposits are found. In addition, the industry has committed to paying communities 1% of the value of the shale gas that is produced – for a site of 40 horizontal wells, this could be worth £5-10 million in total. Finally, operators will pay business rates on their sites – 100% of which will go straight to the local authorities in the area.

I’m interested in a job in fracking but not sure which course to take. I just want a qualification which is an all-rounder just to get my foot in the door. Any advice would be a great help

If the industry is successful it is clear that many jobs will be created, in both engineering and the wider supply chain. If you want to work on well design and operation, we recommend you train for an engineering qualification. To give you an idea of the number of jobs the industry could create, the Institute of Directors believe investment in UK shale production ‘could peak at £3.7 billion a year’, with support for up to 74,000 direct and indirect jobs.1

A National College for Onshore Oil and Gas has recently been announced by the Government. The new centre will seek to train a generation of onshore oil and gas specialists, helping the UK to seize the economic opportunities offered by shale gas. The National College for Onshore Oil and Gas will be headquartered in Blackpool and linked to colleges in Chester, Redcar and Cleveland, Glasgow and Portsmouth.

The Government is providing £750,000 of development funding which will be matched by industry to develop the College. Once the business plan is finalised, further capital funding will be available from the National College programme to support the College on an industry-matched investment basis.

How much would shale gas cost in taxing?

Shale gas development would be entirely privately funded and could boost the tax revenues of the country. This is at a time when tax revenues from North Sea oil and gas are falling, due to decline in production. How much tax revenue shale gas can generate is dependent on how much gain be extracted. In Pennsylvania, unconventional gas activity is estimated to have supported 79,000 jobs, contributed $11.6 billion in value added and paid $1.1 billion in state and local taxes in 2012.

The industry has committed to paying £100,000 to the local community living near to each exploratory well site where hydraulic fracturing takes place. This will be paid by the operator, regardless of whether or not recoverable deposits are found. In addition, the industry has committed to paying communities 1% of the value of the shale gas that is produced. This could be equivalent to £5million to £10million per site over the lifetime of the site. The government has also proposed that £20,000 be paid to the community for each horizontal well drilled.

With regards to the specific tax regime, proposals are being worked up by the Government to ensure that early investment in exploration is encouraged and to ensure that there is a fair return to the tax payer at a later date once shale gas wells are in production.

Can you invest in local firms involved in shale gas exploration?

It is possible to invest in most of the companies who wish to produce natural gas from shale. Most of the large companies who have licenses are floated on the stock exchange, either in the UK or abroad so it is possible to buy shares in them.

However, some of the companies who are interested in producing natural gas from shale are privately owned so it is not possible to invest in them at this stage.

This answer is not designed to provide investment advice – if you require any advice on investments, you should consult a financial or other professional adviser.

Should the shale gas industry be nationalised?

While some people may feel that the shale gas industry, like many other industries, should be nationalised, it remains the case that if it was, the cost of exploration would have to come from taxpayers. Shale gas production requires a significant amount of expenditure ‘up front’ and in some cases, operators may find that it is not worth their while to press on and produce natural gas from shale. Therefore, this provides a risk. At the moment, private companies, not taxpayers, shoulder this risk.

While the shale gas industry is likely to remain in private ownership for the foreseeable future, it is nevertheless the case that the industry has committed to paying £100,000 to the local community living near to each exploratory well site where hydraulic fracturing takes place – whether or not recoverable deposits are found.

In addition, the industry has committed to paying communities 1% of the value of the shale gas that is produced – so communities can receive the benefits of shale gas production but will not be expected to pay up front for exploration costs.

How many jobs will shale gas extraction create?

An inquiry by the House of Lords Economic Affairs Committee reported that specific estimates of the numbers of new jobs which might be created by shale gas development vary widely, but that the opportunities provided could be substantial in areas such as Lancashire.

The Institute of Directors believe investment in UK shale production “could peak at £3.7 billion a year”, with support for up to 74,000 direct, indirect and induced jobs. A report by EY found similar numbers.

It is worth noting that the offshore oil and gas industry currently supports around 450,000 jobs across the UK.

Thank you to everyone who submitted questions similar to the one above. Questions we have received which are similar are shown below:

Why do you persist in lying about the proposed number of jobs shale gas will bring to the NW? Why do you base your figures on the offshore industry - because it is more labour intensive?

Is shale gas cost efficient and how much is in the UK and do British workers get the job of extracting it ?

Will there be any jobs locally

How many LONG-TERM SKILLED jobs will there be for local people?

What will be the alternative for shale gas workers if fracking fails to happen on a large scale?

If fracking fails to happen on a large scale, the industry will not be hiring many shale gas workers, and they would have to look for employment elsewhere. But many of the skills needed for shale gas production, including engineering and geology qualifications, are in demand in other industries.

Will it cause any more damage to coal mining?

The Government has committed to reducing our reliance on coal, so an alternative will have to be found if the Government is to meet its carbon reduction targets.1 At present, if we do not produce shale gas, this alternative is likely to be gas imported from foreign countries, rather than increased coal use.

Who will own and financially benefit from shale gas extraction?

In terms of ownership, shale gas deep underground is owned by ‘the Crown’. However, land owners who have wells drilled on their land will receive payment from shale gas operators.

There will also be financial benefits to communities. The industry has committed to paying £100,000 to the local community living near to each exploratory well site where hydraulic fracturing takes place, together with a £20,000 community benefit payment per unique horizontal well over 200 metres in length and below 300 metres in depth. This will be paid by the operator, regardless of whether or not recoverable deposits are found. In addition, the industry has committed to paying communities 1% of the value of the shale gas that is produced – for a site of 40 horizontal wells, this could be worth £5-10 million in total.

In addition, operators will pay business rates on their sites – 100% of which will go straight to the local authorities in the area. And finally, operators will pay up to 62% tax to the national government on any profits from shale gas production.

If it is viable to extract shale gas in a certain area, the operators themselves will benefit financially. They will only extract shale gas in a certain area if they can make a profit doing so, like all gas and oil companies – and indeed, companies in other sectors.

Thank you to everyone who submitted questions similar to the one above. Questions we have received which are similar are shown below:

Can it be nationalised, or will it just be another way for privatised firms to maunfacture top directors wages while we pay through the nose are noses by extortionate bills?

I would like to know who will be making lots of money from fracking? Will it be British companies?

North sea gas when found was to be cheap for everone except the users fracking if goes ahead will be the same making a fortune for the shareholder but destroying the earth in the process of greed for foreign investors

What safe guards will be put in place to ensure: financial security of people negatively affected by fracking; engineering safety and integrity of an associated operations; profits will be shared with the users

Who are the fat cats who will gain the most profits? We do not want Americanised exploitation here in England. Who is pushing for shale gas? Certainly not the people!

The dangers associated with fracking appears to be very real. Why is the interests and safety of people and countryside secondary, whereas it appears yet again (utilities/banks) ultimately profit for companies is all that matters? Surely renweable energy (safe) etc. is a better route. Homes without gas!

I want to know that the profits from our shale gas go back in to our country and we don't use foreign companies to process.

Does this just benefit the rich? Why aren't you using alternative methods to get energy? Why do polititians not want fracking near them?

Are you only concerned about the share holders?

Is it going to cost me anything? In tax is this going to create jobs? How profitable is it going to be to the rich and the poor? How is it going to effect pollution? Why do we need it ? What is the benefit?

Why are men mining when there's a safer way with shale gas?

There are still operational mines in the UK, because coal is a very inexpensive and prevalent source of energy – and we as a country are still very much reliant on it to generate electricity. However the Government is committed to reducing our reliance on coal as an energy source, primarily because it produces greenhouse gases.

According to the Government’s Department of Energy and Climate Change, as we use less coal in the next 10-15 years for electricity generation, gas will help fill the gap alongside renewable and nuclear electricity, which will help the UK reduce carbon emissions.1

How much benefit will it be for the average working class families?

Shale gas is only in the very early stages of development, so we don’t yet know what the full economic picture will be. It is therefore much too early to say anything detailed about how different communities in different parts of country will be affected or helped.

What we do know is that gas heats over 80% of our businesses and homes, provides 30% of our electricity and is a major feedstock to industry producing everyday items such as toothpaste, fertilisers and lipstick. By 2030 most of our gas will come from outside the UK and we will need to think hard about what the implications of that will be.

Jobs and industry

We can, however, estimate how many jobs shale gas development could create and what industries will benefit the most. Getting ready for UK shale gas, a report by Ernst & Young (EY), said shale gas could have a positive impact on a wide range of industries. It estimated that 64,500 jobs will be needed by the industry at peak, from energy engineers to manufacturers and office support.

Beyond operations to extract shale gas, it is also interesting to note that it could have a positive impact on other industries that use gas. For example, substantial shale gas production in the UK could help retain and develop energy intensive industries and provide feedstock to petrochemical plants. In fact, the House of Lords Economic Affairs Committee’s report on the economic impact of shale gas states that “If there is no prospect that the UK’s shale gas resource will be developed within a reasonable timescale, energy intensive industry is likely to move elsewhere.”1

The House of Commons Energy and Climate Change Committee has also noted that “in the US, the shale gas revolution has had a transformative impact on the manufacturing sector especially the energy intensive industries and in particular the chemicals industries.”2

Beyond industry and employment, you may also be interested to note that there will be direct benefits to communities where shale gas exploration and development takes place. The industry has committed to paying £100,000 to the local community living near to each exploratory well site where hydraulic fracturing takes place, together with a £20,000 community benefit payment per unique horizontal well over 200 metres in length and below 300 metres in depth. This will be paid by the operator, regardless of whether or not recoverable deposits are found. In addition, the industry has committed to paying communities 1% of the value of the shale gas that is produced – for a site of 40 horizontal wells, this could be worth £5-10 million in total. Finally, operators will pay business rates on their sites – 100% of which will go straight to the local authorities in the area.

There are also broad economic and environmental benefits that could help all UK communities.

The economy

Many people believe the primary benefit of shale gas development for the UK is having a more dependable source of energy that doesn’t require the UK to import as much of its energy from abroad. In addition, John Williams, Senior Principal at Pöyry, a global consulting and engineering firm, told us that “shale gas produced here in Great Britain could have other significant economic benefits in terms of job creation, tax revenue and improving the balance of trade.”

Pöyry carried out a study to see the effects that the production of natural gas from shale could have on energy prices in Europe, including the UK. They modelled three scenarios based on the amount of shale gas that might be produced in the UK and Europe. These scenarios were based on ‘no shale’, ‘some shale’, and ‘shale boom’. The model projected that wholesale prices could be lower by 6% in the ‘some shale’ scenario and 14% in the ‘shale boom’ scenario3. However, they added that “most people now agree that Great Britain would not experience a price reduction similar to that which has been seen in the US over the past few years.”

The environment

Finally, the Department of Energy and Climate Change says that UK shale gas would have a lower carbon footprint than the imported liquefied natural gas it would replace. It also says that gas is the cleanest fossil fuel and has half the carbon footprint of coal when used to generate electricity.4 In addition, using coal to produce energy produces significantly more harmful particulates in the air than burning gas does, so there are also benefits to the quality of the air over other sources of energy.5